Home Based Business: Your Ultimate
Tax Shelter
By J. Stephen Pope
Starting and operating your own home based business is the ultimate
tax shelter.
Although this article has been written from a Canadian income tax perspective,
the principles should be practical in other tax jurisdictions.
1. Non-Deductible Personal Living Expenses
All of us have expenses that we incur in everyday living.
Either you rent an apartment or house or you own your residence. Utilities,
insurance, rent, mortgage interest, property taxes, and maintenance and
repairs are typical costs of operating your home.
Likely, you have a vehicle which also consumes large amounts of cash.
Add to this, dining out, entertainment, gifts, alcoholic beverages,
office supplies, telephone and many other expenditures, and you have a
significant cash outflow.
In most cases, as an employee, retired person, investor, student, or
homemaker, few of these expenses are tax-deductible to you.
This means that you must earn a considerable income, pay your income
taxes first, and then use what is left to pay all your expenses.
Some employees may be able to write-off some of their employment related
expenses, if such are required by their contract of employment. However,
even in this situation, the tax deductions are very limited.
2. Your Own Home Based Business Means Tax Deductions
Now consider the situation where you decide to start your own home based
business.
Suddenly, many of your everyday expenses are now being used for business
purposes and are now tax-deductible.
If you use one quarter of your home exclusively for business use, you
will be able to deduct (or write-off) one quarter of all related occupancy
costs. These expenses may include maintenance and repairs (that are not
capital in nature), rent, mortgage interest, house or apartment insurance,
power, heat, water, and property taxes.
As well, your vehicle expenses used for business purposes are another
tax write-off. If you use your car ninety percent for business purposes,
you can deduct ninety percent of your vehicle insurance, gas and oil, maintenance
and repairs, car washes, license and registration, auto club, loan interest
(within certain limits), and other costs from your income. You may also
write-off one hundred percent of your business related parking. Capital
Cost Allownance (C.C.A.) on your vehicle is also allowed for income tax
purposes; depreciation is the accounting term for this tax deduction.
The Canadian government also allows as a deduction, fifty percent of
your business related entertainment expenses.
Also tax-deductible are business related telephone expenses, Internet
access, office supplies, travel, books, memberships, and a host of other
expenditures.
3. Income Splitting with Your Home Based Business
If you have a high paying job, you will pay higher taxes because the
rates of tax increase as your income does.
With your own business, you can pay reasonable wages to your spouse
and children. In this way, you can legally divert income taxed at your
higher rate to your family members that are in a lower tax bracket.
This tax saving technique is called income splitting. It is another
good reason why your own home based business is the ultimate tax shelter.
4. Even a Part-Time Home Based Business Works
Even if you have a full-time job, running a part-time business can be
advantageous.
Of course, you must actually run a real, moneymaking business. Any attempts
to write unprofitable hobbies off will ultimately fail with the taxation
authorities.
If you earned eight thousand dollars during the year from your part-time
business and were able to deduct eight thousand dollars in car expenses,
home office expenses, entertainment costs, office supplies, and other business
related expenditures, you would have a net business income of nil. You
would pay no tax on this additional income.
Don`t miss this important point! Although these tax deductions are actual,
legitimate business expenses, these are expenditures you would probably
have made anyway, whether you had a business or not.
Thus, by rearranging your affairs to start and operate a home based
business, you have been able to convert non-deductible personal expenditures
into legally deductible business expenses. You have successfully sheltered
your income from tax and have split your income with family members in
lower tax brackets.
Yes, indeed, your home based business has become your ultimate tax shelter.
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